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Do the Attractive Returns of Stock Market Indexes Reflect the Reality?

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Do the Attractive Returns of Stock Market Indexes Reflect the Reality

Stock Market Indexes like the Dow Jones & DAX are good for brokers and others promoting stock market in

Stock Market Indexes like the Dow Jones and DAX are good for brokers and others promoting stock market investing, but they do not reflect reality.

Not by a long shot!

The DAX turned 30 years on 1 July 2018. A reason to celebrate? Yes. The most respected German stock index started on 1 July 1988 at 1,164 points (the index was backdated to 30/12/1987 with a start of 1’000 points).

It is now about 9,549.25 (down recently from 13,500 due to Covid-19 which is an exceptional situation and we will be analyzing the index as if the virus had never happened). This corresponds to an average annual return of around 8-9 percent, despite numerous massive slumps in 1998, 2000, and 2008.

However, what most media does not tell you is that the DAX is calculated to paint a pretty picture of the stock market to mislead people who will expect investment returns more than 4 times what they will actually get.

Dividends are simply included in the index un-taxed. Fees and taxes are simply ignored. The “ever-increasing” DAX is, therefore, a useful marketing tool of Deutsche Börse AG. But not a guide to actual investment returns in the real world.

All other things being equal, for those who have accepted and spent the dividend distributions the net return is reduced to about 6% per. Annum. But this is far from the worst of it.

The DAX would not be 13,500, but only under 6,800.

When inflation is taken into account it looks much worse. In a true purchasing power comparison, the DAX after 30 years would be quoted at only around 4,000. Better than nothing, but a long way from the advertised 13,500.

And this does not take into account the substantial costs of entry and exit — or capital gains taxes!

What matters is purchasing power. And that is a lot less than the beautifully calculated fund prospectuses show as past performance in a growth economy.

How about investing in ETFs or equity funds? On average, and only in the best cases, with good luck, you may have earned about as much as 6%.

Unfortunately, you probably didn’t have such good luck. About 95% of all funds are not worthwhile in the long term due to poorer results. The public is fooled time and again into believing they can get rich by “investing” in the stock market. They can’t. They won’t.

Another circumstance can not be understated. Of the 30 stocks included in the DAX index, only about half are still around, 30 years later. Half of the stock have left or even disappeared completely from the scene.

Also, the changes in the weighting of listed industries influence the much-touted price development. One might say that the data is falsified. Why? Because it omits the losses due to the demise of so many components.

In Germany for instance at the turn of the millennium, a few stocks such as Deutsche Telekom and other tech stocks made up a large part of the index weight. Now they don’t. The weighting of the individual stocks or sectors has a significant influence on the price development.

The goal of all the stock indexes is to paint a pretty picture of the stock market to the people who are currently, and always have been misled into expecting investment returns of more than 4 times what they will get.

vesting, but they do not reflect reality.

Not by a long shot!

The DAX turned 30 years on 1 July 2018. A reason to celebrate? Yes. The most respected German stock index started on 1 July 1988 at 1,164 points (the index was backdated to 30/12/1987 with a start of 1’000 points). It is now about 9,549.25 (down recently from 13,500 due to Covid-19 which is an exceptional situation and we will be analyzing the index as if the virus had never happened). This corresponds to an average annual return of around 8-9 percent, despite numerous massive slumps in 1998, 2000 and 2008.

However, what most media does not tell you is that the DAX is calculated to paint a pretty picture of the stock market to mislead people who will expect investment returns more than 4 times what they will actually get.

Dividends are simply included in the index un-taxed. Fees and taxes are simply ignored. The “ever-increasing” DAX is, therefore, a useful marketing tool of Deutsche Börse AG. But not a guide to actual investment returns in the real world.

All other things being equal, for those who have accepted and spent the dividend distributions the net return is reduced to about 6% per. Annum. But this is far from the worst of it.

The DAX would not be 13,500, but only under 6,800.

When inflation is taken into account it looks much worse. In a true purchasing power comparison, the DAX after 30 years would be quoted at only around 4,000. Better than nothing, but a long way from the advertised 13,500. And this does not take into account the substantial costs of entry and exit — or capital gains taxes!

What really matters is purchasing power. And that is a lot less than the beautifully calculated fund prospectuses show as past performance in a growth economy.

How about investing in ETFs or equity funds? On average, and only in the best cases, with good luck, you may have earned about as much as 6 percent. Unfortunately, you probably didn’t have such good luck. About 95 percent of all funds are not worthwhile in the long term due to poorer results. The public is fooled time and again into believing they can get rich by “investing” in the stock market. They can’t. They won’t.

Another circumstance can not be understated. Of the 30 stocks included in the DAX index, only about half are still around, 30 years later. Half of the stock have left or even disappeared completely from the scene. Also, the changes in the weighting of listed industries influence the much-touted price development. One might say that the data is falsified. Why? Because it omits the losses due to the demise of so many components.

In Germany for instance at the turn of the millennium, a few stocks such as Deutsche Telekom and other tech stocks made up a large part of the index weight. Now they don’t. The weighting of the individual stocks or sectors has a significant influence on the price development. The goal of all the stock indexes is to paint a pretty picture of the stock market to the people who are currently, and always have been misled into expecting investment returns of more than 4 times what they will actually get.

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